STRUCTURAL CHANGE IN THE INDIAN ECONOMY



STRUCTURAL CHANGE IN THE INDIAN ECONOMY: SOME EVIDENCE FROM THE PRE-REFORM PERIOD.

Dhanmanjiri Sathe

Head, Dept. of Economics

University of Pune, Ganesh Khind Road

Pune

INDIA 411007

Email- dsathe@unipune.ernet.in

Ph. +91 20 25436215

ABSTRACT

THE PURPOSE OF ECONOMIC DEVELOPMENT IS NOT ONLY TO INCREASE THE OUTPUT, BUT ALSO TO CHANGE THE COMPOSITION OF OUTPUT. AS THE COMMUNITY’S NEEDS ARE SATISFIED, NEW WANTS INEVITABLY APPEAR AND THESE HAVE TO BE MET THROUGH SUPPLIES OF NEW TYPES OF PRODUCTS. MOREOVER, WHILE SOME NEW DEMANDS ARE MET THROUGH HIGHER IMPORTS, SOME NEW SUPPLIES GET DIVERTED TOWARDS EXPORTS. THUS STRUCTRAL CHANGE IN AN ECONOMY CONSISTS OF CHANGE IN THE COMPOSITION OF OUTPUT AND THERE ARE FOUR SOURCES OF THE SAME. THEY ARE 1. CHANGE IN FINAL DEMAND, 2. CHANGE IN EXPORTS, 3. CHANGE IN IMPORT STRUCTURE, 4. CHANGE IN TECHNOLOGY.

IN THIS ARTICLE, WE HAVE EXAMINED INDIA’S SOURCES OF STRUCTURAL CHANGE FOR THE PERIOD FROM 1951-52 TO 1983-84. THOUGH THIS ENTIRE PERIOD FALLS BEFORE THE ‘1991- LIBRALIZATION’ POLICY SHIFT; THERE WERE SUBTLE OVERTURES TOWARDS OPENING UP SINCE THE EARLY SEVENTIES. WE HAVE TRIED TO CAPTURE THE SENSITIVITY OF THE ECONOMY TO THIS POLICY SHIFT. WE HAVE USED THE CHENERY AND SYRQUIN MODEL, WHICH WAS A REFINEMENT OVER CHENERY’S 1960 MODEL. SIX INPUT-OUTPUT TABLES, WITH EIGHTEEN- SECTOR CLASSIFICATION SCHEME HAVE BEEN USED. WE HAVE FOUND SOURCES OF STRUCTURAL CHANGE FOR THE TWO CONSEQUETIVE PERIODS AND FOR THE ENTIRE PERIOD ALSO. THE I-O TABLES AVAILABLE AFTER 1983-84 ARE NOT ORIGINAL TABLES BUT UPGRADED FROM 1983-84 TABLE AND SO WERE NOT USED.

WE FIND THAT THE NON-PROPORTIONAL GROWTH IN THE INDIAN ECONOMY WAS LARGELY A RESULT OF TECHNOLOGICAL CHANGE AND TO A CERTAIN EXTENT, IMPORT SUBSTITUTION, FROM 1951-52 TO 1983-84. HOWEVER, IMPORT SUBSTITUTION DID PLAY A DOMINANT ROLE IN THE FIFTIES AND THE SIXTIES. BUT, AN ANALYSIS OF THE DOMESTIC RESOURCE COST (DRC) SHOWS THAT THIS WAS ACHIEVED AT A HIGH COST. THE CONTRIBUTION OF EXPORTS IN CHANGING THE STRUCTURE OF THE INDIAN ECONOMY HAS BEEN QUITE LIMITED FOR THE SAID PERIOD. THIS IS TO BE EXPECTED GIVEN THE INWARD LOOKING POLICIES FOR THE EARLIER PERIOD. BUT FOR THE SEVENTIES TOO, WE DO NOT SEE ANY EXPANSION IN THE ROLE OF EXPORTS. THUS, AS THE ECONOMY GOT LIBERALIZED, THE ROLE OF IMPORT SUBSTITUTION IN

BRINGING ABOUT STRUCTURAL CHANGE DECREASED BUT CORRESPONDING RISE IN THE ROLE OF EXPORTS DID NOT OCCUR. A COMPARISON WITH THE RESULTS FOR THE S.KOREAN ECONOMY IN THE SIMILAR PERIOD, SHOW THAT STRUCTURAL CHANGE IN THE SAID ECONOMY WAS AS MUCH A RESULT OF SELECTIVE IMPORT SUBSTITUTION AS OF EXPORT EXPANSION.

AT THE SECTORAL LEVEL, WE FIND THAT FIVE SECTORS GREW AT A LESS THAN PROPORTIONAL RATE FOR THE ENTIRE PERIOD UNDER CONSIDERATION AND ALL THESE WERE THE TRADITIONAL SECTORS LIKE AGRICULTURE, TEXTILES ETC. A POSITIVE AND HIGH CONTRIBUTION TO STRUCTURAL CHANGE CAME FROM NON-TRADITIONAL SECTORS LIKE CHEMICALS, IRON & STEEL ETC.

STRUCTURAL CHANGE IN THE INDIAN ECONOMY: SOME EVIDENCE FROM THE PRE-REFORM PERIOD.

Dhanmanjiri Sathe

Head, Dept. of Economics

University of Pune, Ganesh Khind Road

Pune

INDIA 411007

Email- dsathe@unipune.ernet.in

Ph. +91 20 25436215

The purpose of economic development is not only to increase the output but also to change the composition of output. The Second Five Year Plan states “Development alters the levels as well as the structure of demands and supplies, and these changes come about through and further promote changes in the allocation of resources. Obviously a doubling of national income does not mean that all products and services flow in twice the initial rate…. As the community’s needs are satisfied, new wants inevitably appear and these have to be met through supplies of new types of products” (Second Five Year Plan, 1956, pg.12). Thus structural change in an economy consists of change in the composition of output of the economy. The purpose of this paper is to examine the sources of structural change in the Indian economy for the period 1951-52 to 1983-84. An analysis of sources of growth in the total output can be carried out from the demand side and from the supply side. The supply side considers the changes in output due to changes in the productivity of the factors of production. On the other hand, the demand side considers the changes in output as a result of changes in the demand for goods and services. In this paper, we shall examine the change in output from the demand side.

The growth in output from demand side arises out of four factors viz. 1. The change in final demand 2. The change in exports 3. The change in import structure 4. The change in technology. This paper has been organized in the following manner. The next section gives the database of the study. Section 3 explains the methodology used. Section 4 gives the results and the last section gives the conclusions.

Policy regime: The sources of growth for the Indian economy have been estimated for the period from 1951-52 to 1983-84, with special reference to the role of export-expansion and import-substitution. Till the mid-sixties, planning was at it’s best in India. After that, slowly but steadily, the exercise of planning started losing its vitality. In this period, as is well known, the governmental policy with respect to trade has been a part of the overall policies, which gave a lot of emphasis to self-reliance. Thus, in the fifties, there was a thrust on import substitution strategies. However, since the mid-sixties, there was a subtle change in favor of encouraging exports. This trend got reinforced in the succeeding period till the early eighties.

1. Data:

We have used, seven input output tables, at current prices. They are 1951-52 (Indian Statistical Institute, 1960), 1959 (Planning Commission, 1967), 1963 (Venkatramaiah et. al., 1972), 1968-69, 1973-74, 1978-79, 1983-84 (Central Statistical Organization, 1978, 1981, 1989, 1990 respectively).

These tables have been constructed with different methodologies and sectoral classifications. Though we have made many adjustments, it cannot be claimed that they are completely comparable. Broadly, we can assert that the tables for 1968-69, 1973-74, 1978-79 and 1983-84 are highly consistent, because they have an almost similar sectoral classification scheme and they have been prepared using the same methodology by the organization i.e. the Central Statistical Organization.

2. Methodology:

The decomposition methodology, which we have followed was first developed by Chenery (1960) and Chenery, Shishido and Watanabe (1962). We shall follow the refinement as made by Chenery and Syrquin (1980).

2.1 Methodology:

The balance equation is given by X+M= AX+FD+E where X stands for total output, M stands for the imports, AX stands for inter-industry use, FD stands for final demand and E stands for total exports. Pre-multiplying by X,

X (X+M)= X (AX+FD+E)

X= (X/(X+M)) (AX+FD+E).

Let (X/(X+M)) be denoted by u^, ^ standing for the diagonal matrix.

Then, X= u^ (AX+FD+E). Thus, ui^ gives us domestic supply ratio for i.

The interpretation of each of the term on the RHS is as follows. u^ AX is the domestic inter-industry use. It shows us the inputs used which have been domestically produced. u^FD is the final demand satisfied domestically. However, the interpretation of u^E is problematic. Logically speaking, u^E should mean the domestic component of export a term which has no economic meaning.

The Kubo-Robinson (1984) formulation avoids this problem. The formulation is as follows: X=u*(AX+FD)+E. In this equation, a certain proportion (i.e. u ) of inter-industry use (AX) and of final demand (FD) plus the entire exports (E) is equal to the output given by X. Here the domestic supply ratio u does not get applied to the exports and u is defined as

u = (X- E/AX+FD). Hence in the two alternative formulations, the domestic supply ratios are (X/X+M) viz. u^ and (X-E/AX+FD) viz. u. We find in case of u, exports are getting excluded out of the ratio and hence this measure would not be able to measure any changes in exports. Especially in sectors where exports are important, this measure would lead to an incorrect specification of the domestic supply ratio. Then the Kubo-Robinson balance equation does not include imports and therefore they are taken as complementary to domestic goods and can be treated independently of domestic production balances. This goes against the assumption of competitive imports, which we have implicitly made. Moreover u^ is a more widely accepted definition of domestic supply ratio. Thus because of all these reasons we have used u^.

As growth takes place, the sectors in the economy would grow albeit at unequal rates. The proportional rate of growth in output can be defined as

λ= V2/V1,

Where V2 and V1 are the value added for period 2 and period 1 respectively. If a sector has experienced a rate of growth different from λ, then that sector has non-proportional growth. We shall be identifying the sources of non-proportional growth at sectoral level for the Indian economy.

The balance equation is given by

X = u^ (AX+FD+E)

If 1 and 2 are the periods under consideration, then solving for X, we arrive at

X2 =(I - u2^A2)-1 u2^(FD2+E2) and

X1 = (I - u1^A1) u1^(FD1+E1)

If k is the period subscript, then uk^Ak stands for the matrix of domestic coefficients.

Let (I- uk^Ak)-1 denoted by Rkd. This is the domestic inverse matrix. uk^ (FDk+Ek) are the final demand and exports to be supplied from the domestic production.

If λ is the rate of proportional growth in output,

Then X2- λ X1= δX ……. (1)

FD2- λ FD1= δFD …….. (2)

E2- λ E1=δE and Z1= X1+M1….. (3).

δX gives us the non-proportional growth of output in the economy, between periods 1 and 2. δFD and δE represent the non-proportional growth in the final demand and exports respectively. Z1 gives the total supply in period 1. Hence the non-proportional growth of output in the economy, between periods 1and 2 can be written as

X2 - λX1 =[R2d u2^ (FD2+E2)] - λ [R1 d u1^ (FD1+E1)] …………(4)

By opening the brackets and rearranging the terms we arrive at

δX= R2d u2^ δFD+ R2d u2^ δE+ R2d δ u^λZ1+ R2d u2^δAλX1 …….(5)

The interpretation of each of the term on RHS is as follows.

The first component R2d u2^ δFD gives the effects of deviations in domestic demand (u2^δFD) in all sectors with a constant import structure in all the sectors.

The second component R2d u2^ δE captures the effects of deviations in exports (δE) in all the sectors with a constant import structure.

The third component R2d δ u^λZ1 gives us the direct and indirect effects of changes in the import structure. The change in the import structure is captured by δu^ i.e. u2^ - u1^. If for a sector i, δui^ is positive, then it means that import substitution has taken place in sector i. That is, out of total supply (Xi+Mi), more is being supplied by the domestic sources Xi in period 2 than in period 1. Thus, we have defined import substitution as being captured by the rise in domestic ratio. Consequently, when the domestic supply falls in period 2 as compared to period 1, negative import substitution is said to have taken place, for sector 1. The entire third term captures the direct and indirect effects of import substitution between periods 1 and 2.

The fourth component R2d u2^δAλX1 gives us the effects of changes in the input-output coefficients δA i.e. the technological change.

2.2 Some Issues relating to the model

An absolute change in the output of a sector is composed of two parts. One is the proportional expansion in output and second is the deviational expansion in output. The proportional element is given by λ. Thus proportional change in output, between period 1 and period 2 is given by λX1, and has been interpreted as ‘balanced growth in output’ by Kubo-Robinson (1984, p 241). The deviational element, given by δX= X2- λX1, captures the change in output over and above proportional change. Thus by subtracting λX1, we are removing the effects of proportional expansion in output and studying the relative importance of different sources in deviational growth. The method which is suggested is analogous to the removal of “trend in analyzing cyclical variation” (Chenery, Shishido and Watanabe, 1962, p 109).

Secondly, for estimating the impact of each of the factors, we have made use of the Leontief inverse of the domestic matrix given by R2d. Thus both direct and indirect impact of each of the causal factor is estimated. This impact works via induced intermediate demand. Thirdly, we have captured the technological change by the term R2d us^δAλX1. That is, δA gives us the changes in the input-output coefficient and we have not made any distinction between domestically produced input and imported input. This is because we are interested in the change in the coefficients, irrespective of their source of supply.

Any change in the total input-output coefficients is a result of two factors. The first is the change in the production technology and the second is due to the substitution among various inputs. It is not possible to separate these two effects in the above formation.

Fourth, it needs to be noted that import substitution can be a forced phenomenon also, especially in a situation where exports are stagnant. When exports are not rising, imports need to be curtailed due to balance of payments constraints. In this model, it is not possible to distinguish between the ‘forced’ and the ‘genuine’ import substitution.

Lastly, it also needs to be pointed out as Fujita and James (1989, p283) assert, “ causal links between policies and effects are not explicitly incorporated in the framework”.

As we have mentioned before, we have examined the sources of growth from the point of view of sources of demand. We have not considered the changes in the factor supplies. Naturally, it means that we have not dealt with the productivities of the different factor of production. It also need to be remembered that” the observed final demand vectors in this simple inter-industry model reflect(s) both income effects (different elasticities) and shifts in relative prices. Thus, we are measuring exports demands that are a result of the interaction of demand and supply factors” (Dervis, De Melo and Robinson, 1982, p 101)

2.3 A brief review

The pioneering study by Chenery (1960) and Chenery, Shishido and Watanabe (1962) led to many studies and some of the important ones have been reviewed below. The focus of these studies was mainly on the phenomenon of import substitution, and its contribution to growth. In these studies, along with the empirical estimates of import substitution, the different measures of import substitution were also studied. The other three sources of change in the output from the demand side were given much less importance.

Desai (1969) examined the alternative measures of import substitution in the context of finding the contribution of import substitution to the absolute change in the output. It was found that depending on the different measures and the level of aggregation, the results were differing substantially. The import substitution in the Indian economy for the organized manufacturing for the period 1951-63 was examined. It was found that in comparative terms, import substitution in the investment goods sector has predominated the absolute change in the output.

As against this Chenery, Shishido and Watanabe (1962), introduced the direct and indirect impact of each of the four factors of demand, taking into account the inter-industrial linkages. A refinement in this model was made by Chenery and Syrquin (1980) and empirical estimates for five economies (viz. South Korea, Taiwan, Mexico and Japan) were made for the decade of the fifties and the sixties. This type of comparison across countries was carried out by Dervis, De Melo and Robinson (1982) and Kubo and Robinson also. The purpose of carrying out these studies across countries, was first of all, to isolate the sources of growth and secondly to relate the relative importance of foreign trade sources (i.e. export expansion and import substitution) to the corresponding policies pursued. A study by Fujita and James (1989) for the Korean economy, covering the period 1973-83 gives certain interesting results. Generally, the better performance of Korean economy is attributed to outward-looking policies and exploitation of the comparative advantage, which this economy had in labor-intensive goods. But these researchers find that not only in the case of labor-intensive light industries and miscellaneous manufactures was growth export led, but even in the case of heavy industries growth was export-led. Moreover, it was also found that growth in heavy industries was induced significantly by import substitution. Thus the authors claim that the better performance of the Korean economy is as much a result of selective import substitution as of export expansion. Along with the empirical estimates of import substitution, the measure of import substitution and its limitations were also widely examined. The most important contribution was made by Morely and Smith (1970). They have defined import substitution in a very extreme manner. Hence according to them, import substitution is given by the ‘domestic production necessary to substitute completely for imports’ including the intermediate effects of replacing a unit of import (Morely and Smith, 1970, pg. 279). Guillaumont (1979), suggests that import substitution should be studied only at a sectoral level, because, for the economy as a whole i.e. at a global level, the significance of import substitution is not clear. As against this, Pitre and Argade (1988) argue that import substitution should be examined at a global level because it is possible that import substitution taking place in one sector is offset by increase in imports taking place in another.

Having made a brief review of the models of the sources of growth, we are in a position to represent the empirical estimates for the Indian economy. The Chenery and Syrquin (1980) model applied by us, has already been explained.

3. RESULTS:

3.1 At aggregative level:

We have presented the relative contribution of the sources of deviations in total output in Table 1. In the first instance, the contribution of the sources of growth have been identified between two consecutive input-output tables, giving us six sub- periods. Then the entire period from 1951-52 to 1983-84 has been examined.

Table 1 SOURCES OF DEVIATIONS IN TOTAL OUTPUT

(in Rs. Lakh)

RELATIVE CONTRIBUTION OF

| |Period |λ |δX |Final Demand |Exports |Import substitution|Technological change |

|1 |1951-52 to 1959 |1.43 |21698 (100) |-8129 (-37) |-66881 (-308) |48582 (223) |48126(222) |

|2 |1959 to 1963 |1.30 |100758 (100) |-9761 (-9.4)|-19110 (-19) |40550 (40) |89080(88.4) |

|3 |1963 to 1968-69 |1.92 |-264210 (-100) |43816 (16.5) |33939 (13) |-42317 (-16) |-299648 |

| | | | | | | |(-113.5) |

|4 |1969-69 to 1973-74 |1.66 |439696 (100) |8324 (2) |35397 (8) |118222 (27) |277752 (63) |

|5 |1973-74 to 1978-79 |1.65 |666431 (100) |220622 (33.2) |283685 (42.5) |-126771 (-19) |288886 (43.3) |

|6 |1978-79 to 1983-84 |2.00 |1377334 (100) |810933 (58.8) |-268254 (-19.4)|-15559 (-1.1) |874272 (63.4) |

|7 |1951-52 to 1983-84 |20.01 |3790592 (100) |957341 (25.25)|-470863 |1022272 (26.96) |2281842 (60.19) |

| | | | | |(-12.42) | | |

Note: Figures in brackets indicate the share in deviations in total output.

1. We have presented the rate of proportional growth, λ, for the six sub-periods and for the entire period from 1951-52 to 1983-84. We see that for the sub-period 1951-52 to 1959, the rate of proportional growth was 1.43. The highest rate of proportional growth was observed for the period from 1978-79 to 1983-84 at 2. The absolute magnitude of the deviational growth in the output has also been presented. One important point to be noted is the proportional growth in output; in the period 1963 to 1968-69 was negative. This means that for the said period, the rate of growth of value added was higher than growth in the total output. Thus, during this period, the non-proportional growth did not contribute in a positive way – rather it contributed negatively in the rise of total output.

2. With this background, we can examine the break-up of the sources of deviational growth. We observe that for the period 1951-52 to 1959, final demand contributed –37 per cent and exports contributed –308 per cent in the deviational growth. Import substitution contributed 223 per cent and technological change contributed 222 per cent. We get exactly similar results i.e. negative contribution by final demand and exports, and comparatively high and positive contribution by import substitution and technological change for the next sub-period i.e. 1959 to 1963. Thus we can maintain that the fifties and the early sixties were marked by import substitution and technological change playing a predominant role in changing the structure of the economy. This is also the period when the zeal for import substitution was at it’s peak. The period from 1963 to 1968-69 seems to be unique in the sense that the non-proportional growth of the output has been negative in this period. Here the major contributors to negative growth are the import substitution and technological change. The processes of import substitution and technological change seem to have had major reversals in this period. In contrast with the earlier periods, final demand and exports have contributed positively in this period.

3. For the years 1968-69 to 1973-74, we find that the share of import substitution and technological change is important at 27 per cent and 63 per cent respectively, but their dominance has decreased quite a bit as compared to the earlier two periods of 1951-52 to 1959 and 1959 to 1963. For this period, final demand contributed 2 per cent and export contributed 8 per cent.

4. In the period 1973-74 to 1978-79, the importance of final demand and export has increased manifold, with they contributing 33 per cent and 42 per cent respectively. In this period the share of import substitution has become negative. Unlike the earlier period, when the negative contribution of import substitution reinforced the fall in deviational output, here the import substitution has contributed in a negative way while the deviational output has increased. The share of technological change has further increased, though it still remains high at 43 per cent.

5. For the next period, i.e. from 1978-79 to 1983-84, we find that it is the final demand and the technological change, which have played an important role. While the contribution of import substitution has been negative and low at –1.1 per cent, that of export expansion has been negative and quite high at –19.4 per cent.

6. If we examine the over all trends for this sub-periods, keeping 1963 to 1986-69 sub-period aside (because of the negative deviational growth) , the following conclusions emerge.

First of all, it can be seen that the role of technological change in the deviational growth has always been high- though comparatively speaking it has decreased through the period. Thus changes in the input-output coefficients have contributed greatly to non-proportional growth. In contrast, the contribution of import substitution has sharply decreased over the period. Import substitution, which contributed positively till 1973-74, started contributing in a negative manner since then. Positive contribution would mean that import substitution has taken place in the economy i.e. out of the total supply (Xi+Mi), more is being supplied by domestic sources (i.e. Xi) in period 2 as compared to period 1. We find that since 1973-74, domestic supply ratio has been falling. It can also be seen that till 1973-74, technological change and import substitution show similar signs, implying that both of them have been reinforcing each other in their impact. Generally speaking, these two factors go together because import substitution requires technological change and vice versa. However, in the later sub-periods the relationship seems to have been broken and technological change seemed to have taken place without import substitution.

It is the behaviour of export, which is most erratic. In the earlier periods, export expansion contributed in a negative manner to the deviational growth. Then, after 1968 its contribution seemed to have picked up. In fact, for the period from 1973-74 to 1978-79, its contribution was high at 42 per cent. However, for the last sub-period the contribution of exports became negative at –19.4.

On the other hand, final demand has been quite consistently increasing in importance and its contribution became 58.8 per cent for the last sub-period.

In the period 1968-69 to 1973-74, slight beginnings of changes in the trends can be observed. As we have noted, in this period the importance of final demand and exports rose and that of import substitution and technological change fell. This trend became much more pronounced in the sub-period 1973-74 to 1978-79. However, for the last sub-period the trend has persisted only for final demand and not for export expansion.

The relative import liberalization of the mid-seventies, seems to have resulted in negative import substitution for the sub-periods. Discomfort with the export policies and export performance since1970, led to many export promotion schemes. Many task forces were set to rectify the problems with export, in the early years of 1970s. However, the result of all this can be observed only for the sub-period 1973-74 to 1978-79 and not for 1978-79 to 1983-84.

Thus we can remark that in the periods of development, it was technological change along with import substitution, which led to structural change for Indian economy. In the later periods, the contributors were final demand along with technological change.

We shall now examine the sources of growth for the entire period from 1951-52 to 1983-84. It can be observed that for this period, import substitution and technological change have contributed quite substantially at 26.9 per cent and 60.9 per cent, respectively. The contribution of exports has been negative and low at -12.4 percent. On the whole, we conclude that the policy of import substitution was successful to an important extent in changing the structure of Indian economy. It is on the export front that the economy has performed badly. There seems to be a slight change in this trend for the period from 1973- 74 to 1978-79, when the export expansion contributed positively and highly at 42.5 per cent to the total deviational change. However, this trend has not been sustained in the later period. For most of the period under consideration, it is interesting to note that technological change has played a dominating role in changing the structure of the economy.

3.2 At sectoral level:

Having examined the overall trends at an aggregate level, we now probe into the sectoral trends in the composition of the structural change in the Indian economy for the entire period.

In Table 2, we have presented the sectoral break-up of the deviational growth, for the entire period from 1951-52 to 1983-84.

TABLE 2 RELATIVE CONTRIBUTIONS OF SECTORS IN DEVIATIONAL GROWTH

| |Sector |% Share of each of the sectors in the deviational|

| | |growth for the period from 1951-52 to 1983-84 |

|1 |Agriculture |-86.0848 |

|2 |Coke and coal |3.126834 |

|3 |Other mining |9.426464 |

|4 |Food, Drink, and Beverages |-12.9844 |

|5 |Textiles |-3.76522 |

|6 |Paper and Printing |5.542129 |

|7 |Leather and Rubber |6.200235 |

|8 |Non-metallic Minerals |-1.13686 |

|9 |Chemicals and Petroleum |45.5779 |

|10 |Cement |2.424135 |

|11 | Iron and Steel |17.47931 |

|12 |Non-ferrous Metals |2.775281 |

|13 | Metallic Products and Machinery |32.47399 |

|14 |Construction |40.67559 |

|15 |Electricity |18.07055 |

|16 |Railway Transport |-3.13845 |

|17 |Other Transport |18.35417 |

|18 |Other Industries |4.983119 |

| | | |

| |Total |100 |

1. It can be seen from above that out of the non- proportional growth of Rs. 3790592 lakhs, five sectors have had less than proportional growth. They are ‘Agriculture’, ‘Food, Drink and Beverages’, ‘Textiles’, ‘Non-Metallic Minerals’ and ‘Railway Transport’. Out of this , the share of ‘Agriculture’ has been the highest at –86 per cent, followed by ‘Food, Drink and Beverages’ at –12 per cent. The other three sectors’ negative contribution has been quite less. The important positive contributors to the structural growth have been the following sectors. ‘Chemicals and Petroleum’ sector has contributed the most at 45.57 per cent. This is followed by the ‘Construction’ sector at 40.67 per cent. ‘Metallic Products and Machinery’ have contributed 32.47 per cent and ‘Other Transport’ has contributed 18.35 per cent. ‘Electricity’ and ‘Iron and Steel’ have also been contributors to the structural growth. Thus, on the whole, it is the heavy industries and the services, which have contributed in a positive way. The light industries (viz. ‘Textiles’, ‘Paper and Printing’, ‘Leather and Rubber’, ‘Non-Metallic Minerals’), have contributed either negatively or in a very small way.

2. As has been stated, there has been a relative decline in ‘Agriculture’ in the period from 1951-52 to 1983-84. This is mainly due to two reasons. First of all, it is due to the compositional shift in the domestic demand in favor of the manufactured goods, as income rises. Thus as income elasticity of demand for primary products is low, the demand for ‘agricultural’ sector falls. This is precisely what becomes clear from Table 3, where the contribution of ‘final demand’ in total deviation of output of ‘Agriculture’ sector is negative and high at -80.34 per cent. Secondly, we see that, over the period, as growth takes place in the economy, the demand for primary products falls. This is what is implied by negative contribution of technological change, which is -31.60 percent in the deviational growth of the agricultural sector. Only import substitution has contributed positively in this sector at 17.84 per cent.

TABLE 3 SOURCES OF DEVIATIONS AT SECTORAL LEVEL

(From 1951-52 to 1983-84, in percentage terms)

RELATIVE CONTRIBUTION OF

| |Sector |δX |Final Demand |Exports | Import |Technological Change |

| | | | | |substitutions | |

|1 |Agriculture |-100 |-80.34 |-5.88 |17.84 |-31.60 |

|2 |Coke & coal | 100 |52.78 |-8.02 |5.27 |49.96 |

|3 |Other Mining | 100 |35.18 |11.35 |-1.14 |54.60 |

|4 |Food, Drink and Beverages | -100 |-98.28 |-21.14 |-3.66 |23.09 |

|5 |Textiles | -100 |-90.74 |-394.84 |57.19 |328.39 |

|6 |Paper and Printing | 100 |56.01 |3.08 |12.09 |28.81 |

|7 |Leather and Rubber | 100 |69.12 |5.51 |2.46 |22.89 |

|8 |Non-Metallic Minerals | -100 |42.33 |194.47 |-200.50 |-136.29 |

|9 |Chemicals and Petroleum | 100 |28.56 |1.79 |8.02 |61.60 |

|10 |Cement | 100 |82.19 |1.77 |-4.08 |20.11 |

|11 | Iron & Steel | 100 |56.80 |5.01 |9.24 |28.93 |

|12 | Non-ferrous Metals | 100 |47.20 |9.49 |28.19 |15.10 |

|13 |Metallic Products and Machinery | 100 |56.01 |6.21 |15.38 |22.38 |

|14 |Construction | 100 |86.71 |-0.13 |0.54 |12.87 |

|15 |Electricity | 100 |42.72 |-3.06 |3.73 |56.60 |

|16 |Railway Transport | -100 |-141.04 |-1.21 |6.25 |36.01 |

|17 |Other Transport | 100 |65.41 |7.15 |-2.26 |29.69 |

|18 |Other Industries |100 |55.14427 |40.7265 |-6.0895 |10.21873 |

3. As in case of Agriculture, final demand has contributed negatively in case of most of the consumption goods like ‘Food, Drink and Beverages’ and ‘Textiles’. On the other hand, final demand, (which includes Gross Fixed Capital Formation) has contributed positively and in some cases very highly in case of producers goods like Cement, Construction, Other Transport, Metallic Products and Machinery.

4. Technological change has been instrumental in bringing about structural change in the heavy and extractive industries like ‘Chemicals and Petroleum’, ‘Other Mining’, ‘Electricity’ and ‘Coke and Coal’. However, technological change has contributed the highest in case of ‘Textiles’ at 328 per cent.

5. As compared to both final demand and technological change, the contributions of import substitution and export expansion have been of a much lower order. Import substitution has been most successful in case of ‘Textiles’ and ‘Agriculture’, where it has contributed positively at 57.19 and 17.84 per cent respectively. As far as heavy industries are considered, import substitution has been instrumental in bringing structural change in ‘Non-ferrous Metals’ (28.19 per cent), ‘Metallic Products and Machinery’ (15.38per cent). In case of ‘Iron and Steel’ and ‘Chemical and Petroleum’, import substitution has contributed around 8-9 per cent. Positive contribution of exports has been the highest in case of ‘Non-Metallic Minerals’ at 194.47 per cent. Since this sector includes ‘gems jewellery’ – a sector, which started showing increasing exports since mid-seventies, this result is not surprising. This is also the sector, which shows very high negative import substitution (-200 per cent), which reflects the dependence of this sector on the imported raw material. In case of ‘Other Industries’, the contribution has been one of the highest at 40.72 per cent. The negative export contribution in case of ‘Textiles’ – where the contribution is as high as –394.84 per cent, in case of ‘Food, Drink and Beverages’ at –21.14 per cent supports the argument made by Nayyar (1976) that traditional exports were not only neglected by the policy makers, there was a positive bias against their export growth. These two sectors, which have been and continue to be our important exports, showed less than proportional growth for the period considered and to make matters worse, they also show very high negative contribution of export expansion.

3.3 The Cost of Import Substitution

1. We have established above that in India import substitution did play an important role as a source of growth. But it is also important to inquire into the cost involved in the process of import substitution. One of the ways in which this cost can be estimated is on the basis of Domestic Resource Cost (DRC) of per unit of foreign exchange. The DRC has been defined as

DRC= (Vj/V*j )* r

Where V*j is value –added in Indian rupees in the process at international prices, Vj is value added in Indian rupees in the process at domestic prices and r is the number of Indian rupees per unit dollar (Bhagwati and Srinivasan, 1975). Hence if the DRC for a commodity is higher than exchange rate, it is better to import that commodity rather than produce it domestically. As Panchamukhi (1978) states, “The Government should make use of the DRC criterion in choosing protection and incentive policies for import substitution”. Unfortunately, it does not seem to have happened for the Indian economy. It is not possible for us to make one-to-one comparison between the contribution of import substitution to growth and its corresponding DRC, at the sectoral level we have been working with. Nevertheless, we can cite certain general observations based on other studies.

2. Bhagwati and Srinivasan (1975) find that the DRC was, by and large ignored while making allocation decisions with respect to imports and industrial licensing. Hence the resulting allocations were inefficient in nature. Panchamukhi (1978) finds that some of the industries in which import substitution was encouraged have high DRC e.g. electrical equipment, Metal products, industries based on chemical inputs. A study by Nambiar (1977) shows that the DRC for some of the industries belonging to ‘Heavy Industries’ according to our classification has been high. The industries identified are Iron and Steel, Non-ferrous Metal Products, Motor Vehicles, Miscellaneous Scientific Instruments and industries based on chemical inputs.

Thus, on one hand we have established that import substitution played a leading role in the structural change in the economy, but on the other hand, it needs to be remembered that the process was probably a costly one.

4. Conclusions:

The whole idea behind planning in India was to bring about a ‘Structural Change’ in the economy so that the ‘unnecessary rigours’ of an industrial transition are avoided. We have examined the sources of the structural change for the Indian economy for the period from 1951-52 to 1983-84. Though, now the economy is moving away from ‘plan’ and towards the ‘market’, the necessity to bring about structural change in the economy remains. However, the important sources of structural change in the future could be different from what has been observed for the ‘planned’ period. The conclusions emerging from the study are as follows.

a. The non-proportional growth in the Indian economy has been largely a result of technological change, and to a certain extent, import substitution, for the period form 1951-52 to 1983-84. However, import substitution did play a dominant role in the fifties and the early sixties.

b. The contribution of exports in changing the structure of the Indian economy has been quite limited for the period from 1951-52 to 1983-84. This result is to be expected given the inward-looking policies followed by the government.

c. As the economy has got liberalized, the role of import substitution in bringing about structural change has decreased, but a corresponding rise in the role of exports did not occur.

d. At the sectoral level, we find that five sectors grew at a less than proportional rate for the entire period under consideration. Four of these are the traditional sectors viz. Agriculture, Food. Drink and Beverages, Textiles, Non-metallic Minerals and the fifth one is a service industry viz. Railway Transport. Thus there seems to be a bias against the growth of the traditional sectors in the planning process undertaken in this period. A positive and high contribution to structural change has come from Chemicals and Petroleum; Metallic Products and Machinery; Iron and Steel i.e. capital-intensive industries.

REFERENCES

Bhagwati and Srinivasan, 1975; Foreign Trade Regimes and Economic Development : India , A special conference Series on Foreign Trade Regimes and Economic Development, Vol.6, NBER, Columbia University Press.

Central Statistical Organization, 1978: National Accounts Statistics 1970-71 – 1975-76, Input-output Transactions Table for 1968-69, Government of India, New Delhi.

Central Statistical Organization, 1981: National Accounts Statistics 1970-71 – 1978-79, Input-output Transactions Table for1973-74, Government of India, New Delhi.

Central Statistical Organization, 1989: National Accounts Statistics 1970-71 – 1978-79, Input-output Transactions Table for1978-79, Government of India, New Delhi.

Central Statistical Organization, 1990: Input-output Transactions Table, 1983-84, Government of India, New Delhi.

Chenery H.B., 1960: “Patterns of Industrial Growth”, American Economic Review, Vol.50, pp624-654

Chenery H.B., Shishido S. and Wanatabe T. 1962: “ The Pattern of Japanese Growth 1914-1954”, Econometrica, Vol. 30 No. 1, pp 98-139.

Chenery, H. and Syrquin, M. 1980: A Comparative Analysis of Industrial Growth” in R.C.O. Matthews (ed). Economic Growth and Resources, Vol. 2, Proceedings of the Fifth World Congress of International Economic Association held in Tokyo , Japan, pp 223-257.

Dervis, K. De Melo, J. and Robinson, S; 1982: General Equilibrium for Development Policy. A World Bank Research Publication, Cambridge University Press.

Desai, P. 1972: Import Substitution in the Indian Economy 1951-63. Hindustan Publishing Corporation, Delhi.

Fujita, N. and James, W.E. , 1989: “Export Promotion and ‘Heavy Industrialization’ of Korea , 1973-83”. The Developing Economies , pp 236-250. Institute of Developing Economies, Tokyo .

Indian Statistical Institute, 1960: Industrial Relations in the Indian Union, 1951-52’ in Roa, V.K. R.V. et. Al. (ed). Papers on National Income and Allied Topics, Vol. 1 Asia Publishing House, Bombay.

Kubo, Yuji and Robinson, S. , Sherman, 1984 : “Sources of Industrial Growth and Structural Change : A Comparative Analysis of Eight Economies” , in Proceedings of the seventh International Conference on input=output Techniques . The World Bank, Washington D.C.

Nambiar, R.G. 1977: “Import Substitution, Resource Cost and Key Sectors in the Indian Economy”, Economic and Political Weekly, vol..12, pp. 954-962.

Nayyar, D. 1976: India’s Exports and Export Policies in the 1960s, Cambridge University Press.

Pitre V. and Argade L. 1988: “Measurement of Import Substitution: A Special Note”, Economic and Political Weekly, 30 Jan. 1988.

Planning Commission, 1956: Second Five-Year Plan 1956-61, Government of India, New Delhi.

Planning Commission, 1967: “ An Input-Output Table of the Indian Economy for 1959”, Artha Vijnana, Vol.9 Nos. 3 and 4, pp 309-315.

Venkatramaiah, P., Kulkarni, A.R. and Argade, L. 1972: “Input-Output Tables for India, 1963, Artha Vijnana, Vol. 14,pp1-112.

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